FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: NOTICE OF INQUIRY CONCERNING NATURAL GAS PIPELINE NEGOTIATED RATE POLICIES AND PRACTICES
COMMENTS AND DISCUSSION
The Commission’s negotiated rate policy has been a successful and key element in contributing to the efficiency and effectiveness of the competitive natural gas market. The ability to enter into negotiated rate agreements affords shippers flexibility and promotes competition in the marketplace. EPSA sees the negotiated rates program as furthering the Commission’s policy goals of creating more competition in natural gas and power markets. Indeed, the flexibility offered natural gas shippers through negotiated rate deals allows these shipper/generators to offer competitive power supplies into the wholesale electric market.
The growth of the negotiated rates program has increased the number and types of deals available to shippers. This has created the flexibility shippers need but has also created certain specific situations for which the Commission now has questions. In part, the program’s success is demonstrated by the Commission’s ability to now take stock in the status of that program and make adjustments. In reviewing this program the Commission should allow it to develop and must continue to let it grow. Any allegations or even adjudicated findings of limited abuses should not be seen as a signal to shut down the program.
EPSA feels the current structure of the negotiated rate policy works effectively and does not require significant modification at this time. However, some EPSA members would have the Commission explore certain aspects, such as the transparency of the filed negotiated rate deals. Generally, the Commission’s negotiated rate filing requirements provide an adequate amount of information. However, as the nature and number of deals grow, the current requirements may need to be examined to continue to meet the needs of shippers. The current filing requirements of either (a) filing the bilateral contract with the Commission or (b) a tariff sheet that delineates the rate at the delivery and receipt points, as well as the terms of the transportation contract, can create inconsistencies. A single format would address this concern and further the Commission’s goals of standardizing activities and transactions across the pipeline grid. Attempting to match the two requirements to evaluate different deals does not always facilitate the consistent comparability shippers need to make market decisions. As such, the Commission may want to investigate a consistent information format for negotiated rate deals as either part of a North American Energy Standards Board (NAESB) effort or directly through comments on an order as a result of the NOI process.
The recourse rate, as it relates to negotiated rates, effectively mitigates pipeline market power. Regulations concerning affiliate transaction posting of available capacity and discriminatory behavior are central to stopping market power abuses. If these regulations are being adhered to, then the just and reasonable recourse rate provides an adequate measure of mitigation to work in concert with other regulations to prevent any exercise of pipeline market power over rates. Consequently, further mitigation measures overlaying current negotiated rate deals would be unnecessary.
The Commission should not disallow all negotiated rates above the maximum recourse rate. The maximum recourse rate should serve as a market indicator, rather than a threshold for disallowances. It should not be used as a limitation or rate cap. The flexibility provided through negotiated rates allows the pipeline and customer to derive a rate that is mutually beneficial to both. Capping the negotiated rate at the maximum recourse rate would hamper that flexibility. While at times the rate may exceed the recourse rate, as in index-based deals, customers consider the effective rate over the length of the contract and whether that exceeds the recourse rate. Since shippers evaluate negotiated rate deals over their duration, capping them at a multiple of the maximum recourse rate would limit deal flexibility and undermine the negotiated rates program. Even a negotiated rate cap at some arbitrary multiple would limit the flexibility sought by entering into a negotiated rate transaction to begin with. Given the protection of the recourse rate, a willing customer who determines that its economic interests justify a commitment which may result in payment above the recourse should be free to make this choice. Typically, this choice fulfills the Commission’s well-established intent to economically ration pipeline capacity, especially considering the existing bidding regulations.
The Commission should also not disallow negotiated transportation rate deals based on price differentials of delivered gas between hubs. The marketplace should be allowed to formulate the appropriate pricing. The ability to negotiate the transportation rate keyed to the price differentials between hubs allows customers an option in managing their exposure to transportation costs. Transportation costs can be effectively reduced as the price differential narrows between hubs. This option, depending upon a customer’s position in the market, can be a valuable tool in managing a portfolio of gas assets. Further, this pricing technique can not only motivate pipelines to respond to a potential shipper’s business needs, but it may serve to introduce a desirable level of risk in the pipeline’s approach to marketing its capacity.
Finally, index price differential rates should continue to be permitted. EPSA’s experience with rate caps is that they distort markets and typically have the ultimate effect of increasing prices for all participants and, consequently, should not be used. As such, no limits or restraints should be placed on index price differential rates. To the extent parties deem such limits or restraints should be placed on such deals, they should be free to negotiate them.